A. Output Expansion, 1970–84

14. Per capita real GDP doubled during this period, with three-fourths of the expansion stemming from the non-oil sector and the remainder from a rapidly booming oil output. In view of rising oil revenue, government investment increased by an annual average of 2 percentage points of GDP between 1970-74 and 1975-79. Starting in the second half of the 1970s, two new public institutions concerned with cash crops were set up: the Office for Food Crops (Office des Cultures Vivrières—OCV) and Office for Coffee and Cocao (Office du Café et du Cacao—OCC). In addition, farm producer prices were raised repeatedly. Heavy emphasis was given to schooling, and employment was virtually guaranteed for high school and university graduates either in the civil service or in state enterprises. This resulted in serious overstaffing in the government administration and public enterprises. In view of the large expansion in both capital and current expenditures, there was a significant deterioration in public finances in the second half of the 1970s, compared with the first half.

Box III.1.

Republic of Congo: Performance Under Fund Programs, 1986-2003

Source: Fund staff reports on the Republic of Congo.

Program	Period covered	Amount approved (SDR million)	Amount drawn	Implementation status
Staff-Monitored Program	Jan.-Sept. 2003	N/A		Overall weak performance, despite some achievements. Unbudgeted use of windfall oil revenue and significant shortfall in nonoil revenue. Mixed record on structural reform implementation, but efforts made to improve oil sector transparency and public finance management.
Staff-Monitored Program	April-Dec. 2002	N/A		Overall weak performance. Nonoil revenue shortfall, and higher-than-programmed current expenditures. Weaknesses in structural reform implementation.
Staff-Monitored Program	June-Dec. 2001	N/A		Overall weak performance. Deviations in fiscal targets and borrowing from the banking system. Mixed record on structural reform implementation.
				Significant slippages registered in the quantitative targets.
Emergency Post Conflict Assistance	Approved in Nov. 2000	10.6	N/A	Program implementation broadly satisfactory through September 1998, but preparations of a successor new arrangement under the ESAF were derailed due to a renewed outbreak of civil unrest in late 1998.
Emergency Post Conflict Assistance	Approved in July 1998	7.25	N/A
Enhanced Structural Adjustment Facility	6/96-6/99	69.5	13.9	Overall performance under the first annual arrangement was mixed owing to lapses in fiscal discipline and insufficient resolve to implement structural reform. The ESAF midterm review was interrupted in June 1997, following the eruption of civil war. The arrangement remained suspended until its expiration. The program veered off-track shortly after it was launched in the context of continued sociopolitical tensions.
Stand-By Arrangement	5/94-5/95	23.2	12.5	Economic policies diverged from the program objectives as a result of the sudden domestic agitation for political change. Owing to unrest, the first review could not be conducted.
Stand-By Arrangement	8/90-5/92	28.0	4.0	The program veered off-track and could not be brought back on track on account of excess use of bank credit by the government and unprogrammed accumulation of external payments arrears.
Stand-By Arrangement	8/86-4/88	22.4	9.5	Structural measures in the areas of pricing, marketing, public enterprise and recruitment policies were satisfactorily implemented.

Source: Fund staff reports on the Republic of Congo.

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Program	Period covered	Amount approved (SDR million)	Amount drawn	Implementation status
Staff-Monitored Program	Jan.-Sept. 2003	N/A		Overall weak performance, despite some achievements. Unbudgeted use of windfall oil revenue and significant shortfall in nonoil revenue. Mixed record on structural reform implementation, but efforts made to improve oil sector transparency and public finance management.
Staff-Monitored Program	April-Dec. 2002	N/A		Overall weak performance. Nonoil revenue shortfall, and higher-than-programmed current expenditures. Weaknesses in structural reform implementation.
Staff-Monitored Program	June-Dec. 2001	N/A		Overall weak performance. Deviations in fiscal targets and borrowing from the banking system. Mixed record on structural reform implementation.
				Significant slippages registered in the quantitative targets.
Emergency Post Conflict Assistance	Approved in Nov. 2000	10.6	N/A	Program implementation broadly satisfactory through September 1998, but preparations of a successor new arrangement under the ESAF were derailed due to a renewed outbreak of civil unrest in late 1998.
Emergency Post Conflict Assistance	Approved in July 1998	7.25	N/A
Enhanced Structural Adjustment Facility	6/96-6/99	69.5	13.9	Overall performance under the first annual arrangement was mixed owing to lapses in fiscal discipline and insufficient resolve to implement structural reform. The ESAF midterm review was interrupted in June 1997, following the eruption of civil war. The arrangement remained suspended until its expiration. The program veered off-track shortly after it was launched in the context of continued sociopolitical tensions.
Stand-By Arrangement	5/94-5/95	23.2	12.5	Economic policies diverged from the program objectives as a result of the sudden domestic agitation for political change. Owing to unrest, the first review could not be conducted.
Stand-By Arrangement	8/90-5/92	28.0	4.0	The program veered off-track and could not be brought back on track on account of excess use of bank credit by the government and unprogrammed accumulation of external payments arrears.
Stand-By Arrangement	8/86-4/88	22.4	9.5	Structural measures in the areas of pricing, marketing, public enterprise and recruitment policies were satisfactorily implemented.

Source: Fund staff reports on the Republic of Congo.

15. Oil prices rose from an annual average of US$17 per barrel during 1975-79 to about US$33 per barrel in the first half of the 1980s. In view of the rapidly rising oil revenues, the Congolese authorities adopted in 1981an ambitious Five-Year Economic and Social Development Plan, underlying which was an overly expansionary fiscal policy path. This plan gave priority to improving basic infrastructure (roads, railroads, and waterways) and to rehabilitating state enterprises. Government investment rose by an annual average of 15 percentage points between the second half of the 1970s and the first half of the 1980s. Even though current expenditure was curtailed, the domestic financial imbalances, which had widened in the second half of the 1970s, continued to deteriorate in the first half of the 1980s. In addition, the country’s external indebtedness, which had been growing rapidly in the 1970s and early 1980s to finance domestic investment projects, doubled between 1980-84 and 1985-89.

B. Output Collapse, 1985–99

16. The rapid rise in the public sector during the oil boom years of the early 1980s, including in the form of massive public employment creation, partly provided the seeds for the subsequent long decline in output. The oil bonanza came to an end in the second half of the 1980s, when oil prices declined to an annual average of about US$18½ per barrel during 1985-89 (from an annual average of about US$33 per barrel during 1980-84). In view of the associated significant decline in oil revenues, the government took internal adjustment measures, including in the context of a 20-month Stand-By Arrangement launched in August 1986. The list of products⁶ subject to price regulation was reduced, with a view to eliminating subsidies. In addition, the export monopoly of the OCC and the marketing monopoly of the OCV were abolished. Furthermore, the government undertook measures to strengthen public enterprise management and efficiency and liquidate financially unviable enterprises. However, the process of public enterprise restructuring required the government to assume a substantial amount of their debts. Notwithstanding the budgetary constraints, the government continued to raise agricultural producer prices for cocoa, coffee, tobacco, potatoes, and rice.

17. The Congolese policy response to the collapse in the terms of trade in the second half of the 1980s was slow and limited. While current and capital expenditures were lowered, they were not cut back in line with reduced resource availability. The budgetary deficit widened further during 1985-89 from an already large fiscal imbalance during 1980-84. The significant cut in government expenditures, especially capital outlays, during 1985-89 had a deflationary impact on the economy. The non-oil real GDP and the consumer price index each declined by about 3 percent on average per annum during 1984-89. The economic and financial imbalances were exacerbated by the weak performance of the large public enterprise sector, which, even after receiving substantial government transfers and exemptions, experienced continuing losses, which led the government to take over the debt-service obligations of some enterprises. The disappointing performance of the public enterprises was due to rapidly growing personnel costs, inflexible pricing policies that did not reflect production costs, and management problems. The 1986 Stand-By arrangement went off track because of the deviations of macroeconomic outcomes from program targets (e.g., net bank credit to the government and external arrears), although structural measures in the areas of pricing, marketing, public enterprise and recruitment policies were satisfactorily implemented.

18. In order to reverse the declining trends in output, the government continued its attempt in the early 1990s to jump-start the economy—including in the context of a 21-month Stand-By arrangement adopted in August 1990—following a strategy that was based solely on internal adjustment measures, as had been done in the second half of the 1980s. This approach consisted mainly of maintaining the fixed common peg, lowering the fiscal deficit through increases in tax rates and cuts in the wage bill, and restoring external competitiveness by reducing domestic costs and restructuring public enterprises. As a result of a sudden upheaval and agitation for political change, economic policies diverged widely from those underlying the 2000 Stand-By arrangement, and the first review under the program could not be undertaken.

19. Overall, the policy response during the period 1986-93 to the worsened external environment was inadequate, relying mainly on cuts in government investment spending and limited structural reforms. As a result, economic activity stagnated, public sector and external imbalances widened markedly, and the external public debt and debt-service burdens grew to unsustainable levels. In addition, large domestic and external payment arrears were accumulated. The CFA franc became overvalued in the late 1990s because, even though the terms of trade had declined almost secularly between 1980-84 and 1990-94, the real effective exchange rate remained virtually unchanged.

20. Given the magnitude of the macroeconomic imbalances in the late 1980s and early 1990s, it became clear by 1993 that strategies based solely on internal adjustments would be insufficient to put the economy back on a sustainable recovery track. The internal adjustment strategy was insufficient to restore external competitiveness, as nominal domestic prices (including wages and producer prices) showed considerable downward rigidity. The adjustment strategy was broadened in January 1994 with the 50 percent devaluation of the CFA franc. In addition, the government adopted a 12-month Stand-By arrangement in April 1994. Against the background of continued sociopolitical tensions and security concerns, the Congo’s economic performance under the Stand-By arrangement fell short of program expectation, owing to policy slippages, weak management capacity, and disruptions of railroad transportation.

21. With a view to setting the economy on a path of sustainable growth and poverty reduction, the authorities adopted a three-year program under the Enhanced Structural Adjustment Facility (ESAF) in June 1996. The program focused on (i) raising the primary budget surplus, so as to reduce the unsustainably heavy external debt and debt-service burdens; (ii) increasing government outlays on education, health, and public investment, thanks to further savings on the civil service wage bill; and (iii) stepping-up the implementation of a broad range of structural reforms in order to restore confidence in the banking system, enhance financial intermediation, reduce the role of state monopolies, and improve the quality and reduce the cost of public services. Overall performance under the first annual arrangement was mixed, owing to lapses in fiscal discipline and insufficient resolve to implement structural reform. The ESAF midterm review was interrupted in June 1997, following the eruption of civil war, and the arrangement remained suspended until its expiration.

22. Following the five-month civil war in 1997 and the ensuing reconciliation process, the IMF provided technical and financial assistance in the form of an emergency post conflict Assistance (EPCA) approved in July 1998. A key priority under the EPCA was to create the conditions to either reactivate the existing ESAF arrangement or to launch a new three-year ESAF-supported program. Program implementation was broadly satisfactory through September 1998, but preparations for a successor new under the ESAF arrangement were derailed owing to a renewed outbreak of civil unrest in late 1998.

23. Following the 1998/99 conflict, a cease-fire agreement was signed in late 1999, which provided for a national dialogue, demilitarization of political parties, and the reorganization of the army, including the readmission of rebel units into the security forces. The IMF provided technical and financial assistance in the form of an EPCA approved in November 2000. The EPCA was geared toward strengthening the country’s administrative capacity and improving the macroeconomic framework, with a view to launching a successor mediumterm program for sustainable growth and poverty reduction. Nonetheless, significant slippages were encountered on key quantitative targets.

C. Recent Output Recovery, 2000–03

24. Recent developments on the security front are encouraging, against the background of recurrent conflicts in the 1990s (see Section II). The onset of peace in 1999-2000 boosted economic activity and contributed to macroeconomic stability during 2000-03 (Figure III.2). Non-oil real GDP increased by about 10 percent per annum on average during 2000-03. Consumer price inflation decelerated significantly, helped by more reliable supply line from Pointe-Noire to Brazzaville and a strengthening of the euro. The basic primary fiscal balance improved between 1995-99 and 2000-03.

Republic of Congo: Selected Economic Indicators, 1970-2003

(Period average; in percent)

Citation: IMF Staff Country Reports 2004, 231; 10.5089/9781451808520.002.A003

Source: Congolese authorities; and Fund staff calculations.

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Republic of Congo: Selected Economic Indicators, 1970-2003

(Period average; in percent)

Citation: IMF Staff Country Reports 2004, 231; 10.5089/9781451808520.002.A003

Source: Congolese authorities; and Fund staff calculations.

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Republic of Congo: Selected Economic Indicators, 1970-2003

(Period average; in percent)

Citation: IMF Staff Country Reports 2004, 231; 10.5089/9781451808520.002.A003

Source: Congolese authorities; and Fund staff calculations.

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25. Nonetheless, while the post-conflict period ushered in by the 1999 cease-fire agreement has been conducive to improved economic performance and the installation of democratic institutions, it has thus far not been accompanied by the strict implementation of economic programs. Over this period, the program launched in November 2000 under the EPCA and three subsequent staff-monitored programs (SMPs) were not successful at laying the foundations for moving to possible support under the Poverty Reduction and Growth Facility (PRGF). Program implementation has been weak both on the quantitative and structural fronts (see Box III.1). However, the combination of a steadily improving security situation and some encouraging results under the 2003 SMP have generated cautious optimism that a virtuous circle of political stability and economic reform has been set in motion. While overall performance under the 2003 SMP was weak, the authorities took steps, especially later in 2003, to enhance transparency and governance in the oil sector and to strengthen public finance management (see Box III.2 and Section IV).

D. Observations and Evaluation

26. To a large extent, government investment was pro-cyclical, varying in tandem with oil price movements in the international oil market (Figure III.3). Non-oil real GDP growth, in turn, was highly correlated with government investment-GDP ratio (with a correlation coefficient of about 66 percent during 1975-2003). ⁷ Thus, the boom-bust cycle of output appears to have been directly or indirectly linked to oil price movements.

Republic of Congo: Oil Price, Government Spending, and Non-Oil Output, 1975-2003

(5-year moving average; in units indicated)

Citation: IMF Staff Country Reports 2004, 231; 10.5089/9781451808520.002.A003

Source: World Economic Outlook; Bank World Development Indicators; Congolese authorities; and Fund staff calculations.1/ U.S. dollars per barrel.2/ In percent.

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Republic of Congo: Oil Price, Government Spending, and Non-Oil Output, 1975-2003

(5-year moving average; in units indicated)

Citation: IMF Staff Country Reports 2004, 231; 10.5089/9781451808520.002.A003

Source: World Economic Outlook; Bank World Development Indicators; Congolese authorities; and Fund staff calculations.1/ U.S. dollars per barrel.2/ In percent.

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Republic of Congo: Oil Price, Government Spending, and Non-Oil Output, 1975-2003

(5-year moving average; in units indicated)

Citation: IMF Staff Country Reports 2004, 231; 10.5089/9781451808520.002.A003

Source: World Economic Outlook; Bank World Development Indicators; Congolese authorities; and Fund staff calculations.1/ U.S. dollars per barrel.2/ In percent.

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27. The three successive rounds of conflicts in the 1990s followed the economic crisis of the second half of the 1980s. The origin of the economic crisis appears to have been the inadequate policy response to the significant decline in oil prices and the sharp drop in oil revenues, government investment, economic growth. As a result, the budget deficit ballooned to unsustainable levels and the burden of external debt became quite onerous. In a nutshell, these conflicts were preceded by the pre-conditions that have been identified in the recent empirical literature on conflicts (see Section V).

28. As noted in Section II, the conflicts in the 1990s created a major setback for the economic and social progress that had been registered in the 1970s and 1980s. In retrospect, the boom in the 1980s in output growth, investment, and indicators of human capital development—financed by rising oil revenues and external debt—was unsustainable. A policy framework, underpinned by a transparent fiscal rule for the judicious use of oil resources, could have led to a smoother consumption- investment profile and contributed to avoiding the significant output collapse and the conflicts.